Brent Surge Fuels Inflation Fears as USD and Yields Soar
The US dollar has reached its best daily performance since June as Treasury yields on 10-year US bonds touched the psychologically significant 5% level. This milestone was last achieved in 2023, with yields not consistently staying above it since 2007. The peak back then was close to 5.3%. With actual or expected inflation unable to explain such heights, many factors are driving the rally in Treasury yields.
Spending on artificial intelligence is a significant driver, having a direct impact through competition between the Treasury and high-frequency traders in debt markets. Indirectly, investment is fueling the US economy, while growing demand for electricity from data centers is inflating growth and increasing the likelihood of tightening Fed policy.
The key driver of rising Treasury bond yields, however, is the conflict in the Middle East. Since it began in February, Brent crude has risen by 53%, driving up consumer prices and heightening the risk of an acceleration in core inflation due to second-order effects of the prolonged economic impact.